1. 1

2. Job Costing
Chapter 3 2 1 1

3. Life Fitness
Introduce the world’s first computerized exercise bike in 1970s
Design, manufacture, and market over 300 different cardio and strength-training products.
How does the company figure out the profit margins on each of its 300 different model?
The company use product costing systems to trace the direct materials and direct labor used by each job.
The company can use the cost information to make vital business decisions which include as follows:
Setting selling prices that will lead to profits on each product
Identifying opportunities to cut costs
Determining which products are most profitable and therefore deserve the most marketing emphasis

4. Cost of Manufacturing a Product
Most Manufacturers use one of two product costing systems in order to find the cost of producing their products.
Process Costing
Job Costing

5. Distinguish between job costing and process costing
Learning Objective 1
Distinguish between job costing and process costing 5

6. Process Costing
Mass production: produce extremely large numbers of identical units through a series of uniform production steps or processes.
Similar items
Total costs are averaged over all units
Examples
Paint manufacturers
Oil refineries
Cereal manufacturers 6

7. Job Costing Unique, custom products or small batches
Total costs are accumulated by job
Examples
Hospitals
Custom home builders
Advertising agencies

9. S3-1: Examples of Process and Job Costing
A manufacturer of fiberglass insulation
A residential plumbing contractor
c. A manufacturer of fiber optic cable
d. A professional home builder
e. A hospital

10. Learning Objective 2
Understand the flow of production and how direct materials and direct labor are traced to jobs

11. Flow of Inventory Through a Manufacturing System
Raw Materials
Storeroom
Work in process
Production
Department
Finished Goods
Ready for sale
Cost of Goods Sold
Sold

12. Production Schedule for the Month of December
Job
Model Number
Stock or Customer
Quantity
Scheduled
Start Date
Scheduled End date
603
X4 Cross-Trainer
For stock 50
12/2
12/6
604
T5-0 Treadmill 60
12/7
12/17
605
Custom T6-C Treadmill
Bears 15
12/18
12/21
606
Custom S3-C Stair-Climber 12
12/22
12/24
FACTORY CLOSED FOR HOLIDAYS and ANNUAL MAINTENANCE
12/25
12/31

13. Bill of Materials Part Number Description Quantity Needed HRM50812
Heart rate monitor 50
LCD620
LCD entertainment screen
B4906
Front and rear rolling base
100
HG2567
Hand grips
FP689
Foot platform
Etc.
Purchasing will then:
compute stock available.
determine purchasing needs.
make sure raw materials are on hand by production date.

14. Shipping and receiving prepare receiving report
Purchasing Process
Purchasing department will issue a purchase order to its suppliers for the needed parts.
Incoming shipments of raw materials are counted and recorded on a receiving report, which is typically just a duplicate of the purchase order but without the quantity pre-listed on the form.
Accounting department will not pay the invoice (bill from the supplier) unless it agrees with the quantity of parts both ordered and received.
Shipping and receiving prepare receiving report
Purchasing determines ordering needs
Purchasing issues purchase order
Accounting matches invoice with purchase order
Accounting pays the invoice

17. Job Cost Record Job Cost Record Job Number: 603 Customer: For stock
Job Description: 50 units of X4 Elliptical Cross-Trainers
Date Started: Dec Date Completed: _________
Manufacturing Cost Information:
Cost Summary
Direct Materials $
Direct Labor
Manufacturing Overhead
Total Job Cost
Number of Units
÷ 50 units
Cost per Unit
Shipping Information:
Date
Quantity Shipped
Units Remaining
Cost Balance

18. Work in Process Inventory
JOB 560-
Direct Materials
Direct Labor
MOH
Total Job Cost
Work in Process Inventory
Balance Sheet
Life Fitness
November 30
Assets:
Liabilities and Owners Equity:
Cash
Accounts Payable
Accounts Receivable
Wages and Salaries Payable
Raw Materials Inventory
Other Liabilities
Work in Process Inventory
Finished Goods Inventory
Common Stock
Retained Earnings
Property and Equipment
Total Assets
Total Liabilities and Owner’s Equity
JOB 561-
Direct Materials
Direct Labor
MOH
Total Job Cost
JOB 562-
Direct Materials
Direct Labor
MOH
Total Job Cost
JOB 563-
Direct Materials
Direct Labor
MOH
Total Job Cost
The job cost records on incomplete jobs sum to the total Work in Process Inventory shown on the balance sheet

19. Materials Requisition
Number: #7568
Date: 12/2
Job: 603
Part Number
Description
Quantity
Unit Cost
Amount
HRM50812
Heart rate monitor 50
$60
$3,000
LCD620
LCD entertainment screen
$100
5,000
B4906
Front and rear rolling base
100 $5
500
Total
$8,500

20. Raw Materials Record Updated for Materials Received and Used
Item No. HRM Description: Heart rate monitor
Received
Used
Balance
Date
Units
Cost
Total
Requisition
Number
11-25
100
$60
$6,000
11-30
#7235 70
$4,200 30
$1,800
12-1 75
$4,500
105
$6,300
12-2
#7568 50
$3,000 55
$3,300

21. Direct Labor Costs are Traced to Individual Jobs
Labor Time Record
Employee: Hannah Smith Week: 12/2- 12/9
Hourly Wage Rate: $ Record #: 324
Date
Job Number
Start Time
End Time
Hours
Cost
12/2
602 3
$ 60
603 5
$ 100
12/3 8
$ 160
12/4 etc.

22. Direct Labor and Materials Posted to Job Cost Record
Job Number: 603
Customer: For stock
Job Description: 50 units of X4 Elliptical Cross-Trainers
Date Started: Dec Date Completed: _________
Manufacturing Cost Information:
Cost Summary
Direct Materials
Req. #7568: $ 8,500
Req. #7580: $ 14,000
Req. # 7595: $ 13,500
Req. # 7601: $ 4,000
$ 40,000
Direct Labor
No. #324 (30 hours): $ 100, $ 160, etc.
No. #327 (40 hours): $ 240, $ 240, etc.
No. #333 (36 hours): $ 100, $ 120, etc.
Etc (a total of 500 direct labor hours)
$ 10,000
Manufacturing Overhead $
Total Job Cost
Number of Units
÷ 50 units
Cost per Unit

23. Learning Objective 3
Compute a predetermined manufacturing overhead rate and use it to allocate MOH to jobs

24. Manufacturing Overhead
Other manufacturing costs that cannot be directly traced to specific jobs are called Manufacturing Overhead.
These indirect costs, otherwise known as manufacturing overhead, include depreciation on the factory plant and equipment, utilities to run the plant, property taxes and insurance on plant, equipment maintenance, the salaries of plant janitors and supervisors, machine lubricants, and so forth.
We cannot tell exactly how much of these costs are attributable to producing a specific job. Therefore, we cannot trace these costs to jobs, as we did with direct materials and direct labor. Rather, we will have to allocate some reasonable amount of these costs to each job.
Generally accepted accounting principles (GAAP) mandate that manufacturing overhead must be treated as an inventoriable product cost for financial reporting purposes. The rationale is that these costs are a necessary part of the production process: Jobs could not be produced without incurring these costs.

25. Manufacturing Overhead
Management needs some other reasonable basis for allocating the total manufacturing overhead costs to all of the jobs.
A cost driver is the primary factor that causes a cost. For example, in many companies manufacturing overhead costs rise and fall with the amount of work performed in the factory.
There are four steps in calculating the Predetermined Manufacturing Overhead Rate:
Estimate total manufacturing overhead costs
Select an allocation base (cost driver)
Estimate the total amount of allocation base to be used
Calculate predetermined manufacturing overhead rate (POHR)
This rate will be used throughout the coming year. It is not revised, unless the company finds that either the manufacturing overhead costs or the total amount of the allocation base being used in the factory have substantially shifted away from the estimated amounts. If this is the case, management might find it necessary to revise the rate part way through the year.

26. Calculating Predetermined Manufacturing Overhead Rate
Total estimated mfg overhead costs Total estimated amount of allocation base
POHR*=

27. Allocating Manufacturing Overhead (MOH) to Individual Jobs
Allocated MOH =
POHR x Amount of cost allocation activity used

28. Allocating MOH to Individual Job
Example:
Total estimated manufacturing overhead costs = $1,000,000
Cost allocation base is direct labor hours (DLH)
Total estimated direct labor hours for the year = 62,500 DLHs
Job #603 used 500 DLHs
$1,000,000 estimated overhead costs
62,500 direct labor hours
POHR =
= $16 per direct labor hours
*POHR stands for “Predetermined Manufacturing Overhead Rate”

29. Allocating MOH to Individual Job
Why does the company use a predetermined MOH rate, based on estimated or budgeted data, rather than an actual MOH rate based on actual data for the year? In order to get actual data, the company would have to wait until the end of the year to set its MOH rate. By then, the information is too late to be useful for making pricing and other decisions related to individual jobs. Managers are willing to sacrifice some accuracy in order to get timely information on how much each job costs to produce.
The $16 POHR in the example in the slide means that, for every direct labor hour used in a job, $16 will be allocated to the job for manufacturing overhead.

30. Allocating MOH to Individual Job (continued)
Allocated MOH for Job #603
= $16 x 500 DLHs = $8,000
Here we are continuing the example from the previous slide. On the prior slide, we found that the predetermined manufacturing overhead rate was $16 per direct labor hour. The given facts from the example told us that 500 direct labor hours were used for Job #603.
To calculate the amount of manufacturing overhead to be allocated to Job #603, take the predetermined manufacturing overhead rate of $16 per direct labor hour TIMES the actual direct labor hours used for the job of 500. The $8,000 is the amount of manufacturing overhead which will be allocated to Job #603.
*POHR stands for “Predetermined Manufacturing Overhead Rate”

31. Completing the Job Cost Record
Job Number: 603
Customer: For stock
Job Description: 50 units of X4 Elliptical Cross-Trainers
Date Started: Dec Date Completed: _________
Manufacturing Cost Information:
Cost Summary
Direct Materials
Req. #7568: $ 8,500
Req. #7580: $ 14,000
Req. # 7595: $ 13,500
Req. # 7601: $ 4,000
$ 40,000
Direct Labor
No. #324 (30 hours): $ 100, $ 160, etc.
No. #327 (40 hours): $ 240, $ 240, etc.
No. #333 (36 hours): $ 100, $ 120, etc.
Etc (a total of 500 direct labor hours)
$ 10,000
Manufacturing Overhead
$16/ DL hour × 500 DL hours= $8,000
$ 8,0000
Total Job Cost
$ 58,000
Number of Units
÷ 50 units
Cost per Unit
$ 1.160

32. When is Manufacturing Overhead Allocated?
The job’s cost, as shown on the job cost record, becomes the basis for valuing inventory and the cost of goods sold.
In most sophisticated systems, some manufacturing overhead is allocated to the job each time some of the allocation base is posted to the job cost record.
In less sophisticated systems, manufacturing overhead is allocated only once: as soon as the job is complete and the total amount of allocation base used by the job is known.
If the balance sheet date arrives before the job is complete, a company would need to allocate some manufacturing overhead to the job based on the number of direct labor hours used on the job thus far.

33. When is Manufacturing Overhead Allocated?
Direct
Materials
Indirect
Factory Overhead
Allocate
Work in Process
Finished Goods
Indirect
Cost of Goods Sold
Direct
Labor

34. Cost Flow Direct Materials Direct Labor Overhead Cost of Goods Sold
Direct costs are charged to the job cost record. As goods are finished, they move to finished goods inventory. As finished goods are sold, the cost of those goods sold is expensed to cost of goods sold. Gross profit can be determined by subtracting the cost of goods sold from the sales revenue.
Direct
Materials
Direct
Labor
Manufacturing
Overhead
Cost of Goods Sold
Work in Process
Finished Goods

35. E3-18A
E3-18A asks you to compute a predetermined overhead rate and calculate cost of job.
Dellroy Restaurant Supply manufactures commercial stoves and ovens for restaurants and bakeries. Dellroy uses job costing to calculate the costs of its jobs with direct labor cost as its manufacturing overhead allocation base. At the beginning of the current year, Dellroy estimated that its overhead for the coming year would be $300,000. It also anticipated using 25,000 direct labor hours for the year. Dellroy pays its employees an average of $20 per direct labor hour. Dellroy just finished Job 371, which consisted of two large ovens for a regional bakery. The costs for Job 371 were as follows:
Job 371
Direct materials used $13,000
Direct labor hours used
What is Dellroy’s predetermined manufacturing overhead rate based on direct labor cost?

36. E3-18A
Calculate the manufacturing overhead to be allocated based on direct labor cost to Job 371.

37. E3-18A What is the total cost of Job 371? Direct materials used
Direct labor cost (110 x $20)
Manufacturing overhead allocated
Total cost of Job 371

38. Determine the cost of a job and use it to make business decisions
Learning Objective 4
Determine the cost of a job and use it to make business decisions

39. Reasons Why Management Needs Product Cost
Control costs: By examining the exact costs traced to the job, management might be able to determine ways of reducing the cost of similar jobs produced in the future. For example, are the heart rate monitors costing more than they did on previous jobs?
Perhaps management can renegotiate its contract with its primary suppliers, or identify different suppliers that are willing to sell the parts more cheaply.
What about direct labor costs? By examining the time spent by various workers on the job, management may be able to improve the efficiency of the process so that less production time is required.
Assess profitability of products: Managers will compare the gross profit on each model to the gross profit ratio of all models to determine which products to emphasize selling. Obviously, management will want to concentrate on marketing those models that yield the higher profit margins.
Pricing decisions: Management can also use this information to determine how it will deal with pricing pressure. Say a competitor drops the price of its similar elliptical cross-trainer. A profit analysis could show that Life Fitness could drop the selling price of its elliptical cross-trainer by a similar amount and still make a reasonable profit.

40. Reasons Why Management Needs Product Cost
Discounts on high-volume sales: Often times, customers will expect discounts for high-volume sales. Knowing the cost of products will help Life Fitness know whether a discounted price will still be profitable for the company.
Bids on contracts: Suppose management at Life Fitness has the opportunity to bid on a contract to supply custom treadmills for a nearby university fitness center. Management can use the job cost records from past treadmill jobs to get a good idea of how much it will cost to complete the custom order. For example, the custom treadmills may require additional components not found on the standard models.
The markup percentage or final bid price is agreed upon in a written contract before the company goes ahead with production.
Factor in these additional costs to get an estimate of the total job cost, before it is produced. Life Fitness will most likely use cost-plus pricing  to determine a sales price for the custom job.  
Financial statement preparation: Finally, the job cost information is critical to preparing the company’s financial statements. Why? Because the information is used to figure out the total Cost of Goods Sold shown on the income statement, as well as the Work in Process and Finished Goods Inventory accounts shown on the balance sheet.

41. Learning Objective 5
Compute and dispose of overallocated or underallocated manufacturing overhead

42. Overhead Application Example
FedCorp allocates manufacturing overhead based on direct labor hours. Total estimated manufacturing overhead for the year is projected to be $200,000. Total estimated direct labor cost is $140,000, while total estimated direct labor hours to be worked are 10,000. What is FedCorp’s predetermined manufacturing overhead rate?

43. Overhead Application Example (continued)
FedCorp allocates manufacturing overhead based on direct labor hours. Total estimated manufacturing overhead for the year is projected to be $200,000. Total estimated direct labor cost is $140,000, while total estimated direct labor hours to be worked are 10,000. What is FedCorp’s predetermined manufacturing overhead rate? POHR = $200,000 ÷ 10,000 = $20 per DLH

44. Overhead Application Example (continued)
FedCorp’s actual manufacturing overhead for the year was $190,000. A total of 11,000 direct labor hours were worked. Using FedCorp’s predetermined manufacturing overhead rate of $20 per direct labor hour, how much overhead was allocated to all of FedCorp’s jobs during the year?

45. Overhead Application Example (continued)
FedCorp’s actual manufacturing overhead for the year was $190,000. A total of 11,000 direct labor hours were worked. Using FedCorp’s predetermined manufacturing overhead rate of $20 per direct labor hour, how much overhead was allocated to all of FedCorp’s jobs during the year? MOH Allocated = $20 x 11,000 = $220,000

46. Now we look at what to do if (WHEN) actual MOH does not equal allocated MOH.
Continuing same example (FedCorp)

47. Overhead Application Example (continued)
FedCorp’s actual overhead
FedCorp’s allocated overhead
Difference
$190,000
$220,000
$ 30,000
“Target” was $190,000;
actually allocated $220,000. Overapplied by $30,000.

48. Underallocated or Overallocated Manufacturing Overhead
Underallocated (undercosted)
– not enough allocated to jobs
– too little expense
Overallocated (overcosting)
– too much allocated to jobs
– too much expense

49. Underallocated or Overallocated Manufacturing Overhead
Why/How?
Estimated manufacturing overhead costs were higher or lower than actual
Used more or less of the estimated allocation base than projected
2 Solutions:
Adjust cost of goods sold
Prorate between Cost of Goods Sold, Work in Process Inventory, Finished Goods Inventory

50. Prepare journal entries for a manufacturer’s job costing system
Learning Objective 6
Prepare journal entries for a manufacturer’s job costing system

51. General Journal ntries for Materials Procurement
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Materials inventory – canvas 70,000
Accounts payable 70,000
Materials inventory – thread 1,100
Accounts payable 1,100
Once the materials are received and verified against the purchase order and the invoice received from the supplier, the purchase is recorded as a debit to Materials Inventory and a credit to Accounts Payable.
These materials will remain in the raw materials storeroom until they are needed for production. The liability in Accounts Payable will be removed when the supplier is paid.

52. Subsidiary Ledger Entries
C865
Canvas (black)
7/10
7000
$10
70,000
7000
$10
70,000
T444
Thread (black)
7/10 55
$20
1,100

53. Accounting for Materials
Raw Materials
Work in Process
Direct Material
Direct Material
Material
Purchases
Indirect Material
Manufacturing Overhead
Actual Overhead Costs

54. S3-10: T-Account for Raw Materials
Beginning bal
Purchases
Requisitioned
Ending bal
Short Exercise 3-10 asks you to record purchase and use of materials .
Trekker manufactures backpacks. Its plant records include the following materials-related transactions:
Purchases of canvas (on account) $70,000
Purchases of thread (on account) ,100
Material requisitions:
Canvas ,000
Thread
Make the journal entries to record these transactions. Post these transactions to the Raw Materials Inventory account. If the company had $35,680 of Raw Materials Inventory at the beginning of the period, what is the ending balance of Raw Materials Inventory?

55. Labor Journal Entries Examples
JOB XYZ-1
Direct Materials
$40,000
Direct Labor
$10,000
Manufacturing Overhead
Total Job Cost
JOB XYZ-2
Direct Materials
$40,000
Direct Labor
$10,000
Manufacturing Overhead
Total Job Cost
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
Work in Process Inventory ,000
Wages payable ,000
Manufacturing Overhead ,500
Wages payable ,500 55

56. Accounting for Labor Wages Payable Work in Process
Direct Labor
Direct Material
Incurred
Indirect Labor
Direct Labor
Manufacturing Overhead
Actual Overhead Costs
The flow of data for the accounting required to track labor starts in both the Wages Payable (MFG Wages) and Manufacturing Overhead (MFG OH) accounts. The costs flow from the MFG OH head account to MFG Wages and are then combined to be transferred into the Work in Process Account.

57. Accounting for Manufacturing Overhead Actual Overhead Costs`
Work in Process
Overhead Applied to Work in Process
Actual Overhead Costs`
Direct Material
Direct Labor
Overhead
All of the other indirect costs of operating the manufacturing plant during the month are also accumulated in the Manufacturing Overhead account until they can be allocated to specific jobs.
Since we accumulated all actual manufacturing overhead costs into an account called Manufacturing Overhead (through debiting the account), we now allocate manufacturing overhead costs out of the account by crediting it.

58. Accounting for Finished Goods
Once the job has been completed, the three manufacturing costs shown on the job cost record are summed to find the total job cost. If the job consists of more than one unit, the total job cost is divided by the number of units to find cost of each unit.
We see the flow of costs from Work In Process to Finished Goods Inventory. From Finished Goods Inventory, the items are sold, and move from this account to the Cost of Goods Sold account, where they become part of the Income Statement.
The jobs are physically moved off of the plant floor and into the finished goods warehouse. Likewise, in the accounting records the jobs are moved out of Work in Process Inventory (through a credit) and into Finished Goods Inventory (through a debit).
To record the sale of products, two journal entries are needed. The first journal entry records the revenue generated from the sale and shows the amount due from the customer. As shown here, the second journal entry reduces the company’s Finished Goods Inventory, and records the Cost of Goods Sold.
All costs incurred outside of manufacturing function of the value chain, period cost, would be expensed in the current month and shown as “operating expenses” on the company’s income statement.

59. Accounting for Finished Goods
Work in Process
Finished Goods
Direct Material
Direct Labor
Manufacturing Overhead
Cost of Goods Manufactured
Cost of Goods Manufactured
Cost of Goods Sold
Cost of Goods Sold
Cost of Goods Sold

60. Manufacturing Overhead Analysis
$20,000
$ 18,000
$18,000
$20,000
$2,000
$2,000
Overhead was under applied - Cost of Goods Sold is UNDERSTATED
Overhead was over applied - Cost of Goods Sold is OVERSTATED
Cost of Goods Sold

61. Closing Manufacturing Overhead
Under Allocated Manufacturing Overhead
Over allocated Manufacturing Overhead
$20,000
$18,000
$ 18,000
$2,000
$2,000
$2,000
$2,000
Cost of Goods Sold
Cost of Goods Sold
$2,000
$2,000

62. E3-49B Exercise 3-49B asks you to prepare journal entries.
Record the following transactions in general journal.
a. Received bill for Web site expenses, $2,200.
b. Incurred manufacturing wages, $19,000, 55% of which was direct labor and 45% of which was indirect labor.
c. Purchased materials on account, $18,000.
d. Used in production: direct materials, $9,500; indirect materials, $4,000.
e. Recorded manufacturing overhead: depreciation on plant, $14,000; prepaid plant insurance expired, $1,700; plant property tax, $3,500 (credit Property Tax Payable).
f. Allocated manufacturing overhead to jobs, 190% of direct labor costs.
g. Cost of jobs completed during the month, $38,000.
h. Sold all jobs (on account) completed during the month for $62,000. Assume a perpetual inventory system.

63. E3-49B a. Advertising expense Cash b. Work in process inventory
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
a. Advertising expense
Cash
b. Work in process inventory
Manufacturing overhead
Wages Payable
c. Raw materials inventory
Accounts payable 63

64. E3-49B d. Work in process inventory Manufacturing overhead
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
d. Work in process inventory
Manufacturing overhead
Raw materials inventory 64

65. E3-49B e. Manufacturing overhead Accumulated depreciation, plant
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
e. Manufacturing overhead
Accumulated depreciation, plant
Prepaid insurance
Property tax payable 65

66. E3-49B f. Work in process inventory Manufacturing overhead
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
f. Work in process inventory
Manufacturing overhead
g. Finished goods inventory
Work in process inventory 66

67. E3-49B h. Accounts receivable Sales revenue Cost of goods sold
GENERAL JOURNAL
DATE
DESCRIPTION
REF
DEBIT
CREDIT
h. Accounts receivable
Sales revenue
Cost of goods sold
Finished goods inventory 67

68. End of Chapter 3